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What does the Shanghai Pilot Free Trade Zone mean for real estate markets?

2013-11-20T06:00:00Z

Jones Lang LaSalle’s issues new research report

Shanghai, 20 Nov 2013 – Following the launch of China’s first free trade zone (FTZ) at the end of September, Jones Lang LaSalle has issued a white paper that analyses the impact this decision could have on the Shanghai real estate market.

The FTZ, occupying 28.8 square kilometres, consists of four areas along Shanghai’s east coast, namely Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Park, Pudong International Free Trade Zone and Yangshan Free Trade Port Area. The FTZ is much more than just free trading; it will serve as a test ground for China’s economic reforms, especially in the service sector.

Joe Zhou, Head of Research for Jones Lang LaSalle Eastern China comments: “While we see great promise and great potential in what the FTZ will mean for Shanghai and for China, the progress is likely to be slow and cautious for some time yet, With respect to real estate, we don’t think the FTZ results in the development of competing CBDs to Shanghai’s existing city centre. However, the FTZ will be a catalyst for financial reform and deregulation, which is a very important driver for office demand and will benefit the existing CBD in the medium to long term. ”

Offices

The FTZ is a giant step forward for Shanghai to become a truly world city and global financial centre. However, the immediate impact of the FTZ will be limited to a near-term boost to office demand in the zone itself due to new business setup. There is not much possibility that any of the four areas that comprise the FTZ will become “new CBDs” over the medium to long term, for four main reasons.

Firstly, in terms of location, all areas of the Shanghai FTZ are situated along the coastal edge of the city and are between 25-60 kilometres from the existing CBD. In addition, these zones are currently occupied in large part by warehouses, and lack a business environment, amenities, or infrastructure that could compete with downtown.

Secondly, although the two constituent zones in Waigaoqiao are relatively close to downtown, both are largely built out and thus far no redevelopment plans have been released by the government.

Thirdly, from a city planning perspective, the government does not intend to build a new financial or business centre in the new FTZ to compete with the existing Lujiazui CBD and emerging business clusters such as Qiantan. The likelihood that the FTZ will be expanded to the whole city after several years’ time means that building a new CBD in the pilot zone would ultimately be superfluous.

Finally, companies that register to do business in the FTZ are not required to set up a physical office in the zone to conduct their trading or financial activities, meaning their existing offices downtown will suffice.

Warehousing

The prospects are somewhat better for the FTZ’s impact on the warehouse sector, particularly for bonded space, which is already located in large part within the FTZ’s boundaries. In addition to promoting financial reforms, the FTZ also explicitly aims to enhance Shanghai’s role as a shipping and logistics hub. It is expected that customs policies and other trade regulations in the FTZ will be streamlined to make Shanghai more competitive with existing Asian trading centers like Hong Kong and Singapore. Anticipation for the FTZ has already sparked a wave of interest in Shanghai’s bonded warehouses, with inquiries up and optimistic landlords raising rents. Whether this new activity becomes a trend will depend on the speed and scope with which the FTZ’s trade-oriented policies are enacted.

Retail

As for the retail market, we do not expect the FTZ to become a major shopping destination. At this stage there is no indication that a special tax regime will be in place to enable duty-free shopping or duty-free outlets. While preliminary reports do suggest that select e-commerce sites will partner with the zone, this does not extend to any particular tax benefit. We do see opportunities however to invigorate sales of imported items if any tax reductions are granted in the future.

Conclusion

The new FTZ will have profound implications for office demand throughout Shanghai in the medium to long term. The official launch of the FTZ is a signal of the government’s continued commitment to moving forward with financial and service sector reform and to positioning Shanghai as a global financial centre. It is expected that the zone will allow for experimentation with pilot reforms in financial deregulation, RMB convertibility, and interest rate reform. This will benefit the city’s financial services industry and spur greater demand for downstream professional services which are traditionally located in the city’s existing CBDs. By utilizing a “negative list” approach rather than only allowing a specific set of industries towards foreign investment, the FTZ will also bring new sources of demand for office space from industries such as education and medical services.

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About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $46.7 billion of real estate assets under management. For further information, visit www.jll.com

Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 26,700 employees operating in 80 offices in 14 countries across the region. The firm was named ‘Best Property Consultancy’ in three Asia Pacific countries at the International Property Awards Asia Pacific 2013, and won nine Asia Pacific awards in the Euromoney Real Estate Awards 2013.www.ap.joneslanglasalle.com

In Greater China, the firm has approximately 1,700 professionals and 12,000 on-site staff, providing quality real estate advice and services in the areas of retail, residential, commercial, management services, project and development services and research. The firm has been serving key clients including various government agencies and developers, as well as owners of high-end residential and commercial buildings in over 80 cities across China. www.joneslanglasalle.com.cn